GST aka Goods and Service Tax is like a new kid on the block. Everyone wants to know it, but no one is getting it. So let’s try to get to know it bit better. It all begins. In 2000 Mr Atal Bihari Vajpayee’s government sets up a committee to kick-start the process of adopting GST. On 28th February 2006 Mr P. Chidambaram (Finance Minister at that time) hinted about implementing the GST by 2010. GST is going to have a big impact on Indian economy.
In order to achieve that target, Mr P. Chidambaram set up another committee of State Finance Ministers. After a long wait in 2014 GST got introduced in the Lok Sabha by the honourable Finance Minister Mr Arun Jaitely as 122 Amendment Bill which was passed in 2015. Then it was moved to Rajya Sabha who luckily passed it on 3rd August 2016 and then finally the Amended bill was passed by Lok Sabha on 8th August 2016. But it wasn’t official yet.
The Bill after the ratification of States was approved by President Pranab Mukherjee on 8th September 2016 and was officially notified in the Gazette of India. Pheww… quite a roller-coaster isn’t it?
Highlights on impact of GST on Indian Economy
Reshapes Indirect Tax Structure: The GST will reshape the structure of indirect tax by a subsuming majority of indirect taxes like excise, services and sales levies. This will do away with the complex structure of indirect tax of the country, thus improving the ease of doing business in the country.
Exports: Exports will become competitive as the GST regime will eliminate the cascading effect of taxes. A National Council of Applied Economic Research study suggested that GST could boost India’s GDP growth by 0.9-1.7 per cent. GST is a key ‘brahmastra’ for India’s gross domestic product in times of challenging global environment.
Gross Domestic Product: In terms of growth impact of GST implementation, the near-term could be a mess, with adjustment costs for the private sector grappling with inter-sector implications, and the central government (CG) trying to compensate states for revenue loss. If the GST rate is set at around the 17-18%, service producers would face an increased tax burden while manufacturers would see a fall. That could cause manufacturers not to pass through benefits and service providers to pass on costs, moves that would lower consumption and overall growth. At present, the effective indirect tax rates on services and goods are 15 percent and 22.5 percent, respectively.
Inflation: Initially, the implementation of the GST in the near-term could bring some upturn in inflation; however, the effect should be transitory. The service tax rate could shoot up from the current level of 15 percent (including Krishi Kalyan Cess). Under the GST tax regime, this tax rate may go up to 18%. This has led to fears that inflation could rise in the short term. A revenue-neutral rate (RNR) of 15 percent with a low rate of 12 percent and a standard rate of 18% would have a negligible inflation impact. But a higher RNR with a lower rate of 12 percent and a standard rate of 22 percent meanwhile, would have a 0.3-0.7 percentage point impact on aggregate inflation, it continued. (CPI) Consumer price inflation could rise by 0.2 percentage points if the GST rate is kept at 18 percent. If the rate is set at 22 percent, CPI could increase by 0.7 percentage points.
Foreign Exchange: The GST will be welcome news for the Indian rupee (INR). So far, the currency has yet to see a GST boost. It is believed that GST will lead to wider foreign direct inflows of investment and a narrow current account deficit-factors that should help the INR eventually outperform other Asian and emerging market currencies.
Impact of GST on Make–in–India: The ‘Make in India’ campaign is proposing to 1make India a world-class manufacturing hub. The tax reforms through GST will play a crucial role to attract large-scale investment. The impending Goods and Service Tax promises a progressive tax system which avoids tax cascades and helps establish India as a true common market. GST will reduce the cost of production and allows the hassle free supply of goods. This can increase the ease of doing business in India.
Related Post: How will Imports be Taxed Under GST?
Unification of Market: GST will lead to the unification of the market, which would facilitate seamless movement of goods across states and reduce the transaction cost of businesses. A UBS Securities study found that truck drivers in India spend nearly 60 percent of their time off roads negotiating check posts and toll plazas. The foreign brokerage said that 11 categories of taxes are levied on the sector of road transport. The GST will help bring down logistical costs.
Credit to Manufactures: Under the GST, manufacturers will get credits for all taxes paid earlier in the goods/services chain, therefore, incentivizing firms to source inputs from other registered dealers. This could bring in additional revenues to the government as the unorganized sector, which is not part of the value chain, would be drawn into the tax net.
Credit to Dealers: To claim input tax credit (ITC), each dealer has an incentive to request documentation from the dealer behind him in the value-added/tax chain. Thus, the new tax regime is seen as more self-policing, less intrusive and hence more effective way of reducing corruption.
Clean–up India: The clean-up of the Indian taxation system will reduce the number of excise duty exemptions. According to the government’s estimates, excise tax exemptions results in foregone revenues of Rs. 1.8 lakh crore. The comparable figure for the states is about Rs. 1.5 lakh crore. Together, India loses about 2.7 percent of GDP because of exemptions.